As the cost-of-living crisis bites, a growing number of people are experiencing debt issues. Research from Ivey Business School suggests that those who are honest about their debt and join peer-supported debt counseling groups are more likely to come out the other side well than those who keep their problems secret. This is not always easy, however, given the social stigma associated with the issue.
“We have this tendency, as a society, to avoid talking about our finances, and especially about debt. And if you look at it through the lens of stigma—that fear of judgment—you find that there is a group of people who are really anxious about what others will think, and that influences how transparent they are and how far they’ll go to keep it a secret,” the researchers explain.
Avoiding stigma
The scale of the problem was underlined by the finding that around 20% of those who were currently experiencing financial problems were worried about the social stigma they might experience as a result.
“We see the same people reporting their general tendencies around being secretive and not talking with friends and family about debt, which leads to delaying and avoiding help, and spending more in social situations to hide their actual financial situation,” the authors explain.
With 80% of American families holding consumer debt, the average debt amounting to $38,000 in addition to their mortgage, the issue of debt is particularly concerning. Credit card delinquencies are projected to rise to 2.6% by the end of 2023, a 20.3% increase year-over-year, as consumers navigate high inflation and rising interest rates while still using credit cards.
Getting help
Previous studies have shown that peer support can be helpful in situations where people may fear being stigmatized. However, this is the first study to investigate its impact on well-being in the context of debt, as well as the first to link social benefits to changes in behavior related to debt repayment.
In a field experiment with a financial education company, researchers provided financial education to middle-class consumers. The participants had an average household income of $86,000 and an average consumer debt of $36,000 (not including mortgages). The education was delivered by professional instructors through either private online webinars or in-person community-based classes with other indebted consumers.
Participants in the community-based classes paid off $4,370 more of their debt on average compared to the control group who received no financial education during the study. In contrast, those in private online classes paid off $3,531 on average. The study found that individuals who were more concerned about stigmatization did better in a group environment, where they could connect with and receive support from others. Those in private settings were more likely to conceal their debt, even as they sought personal finance guidance.
Participants who were moderately to extremely concerned with being stigmatized reported a 15% increase in well-being when enrolled in the community-based course, compared to an 8% increase in the private course. Similarly, those who were moderately to extremely concerned with being stigmatized repaid around 7% of their debt in the community-based course compared to 5% in the private course.
“The course gives them a bit of a cathartic release because they see there are other people like them, who feel the same way, and so they can talk about it,” the researchers explain. “They have a common base of experiences, and they’re not being judged, which makes them even more motivated.”
Financial stress
The actual dollar amount of debt was not found to be the most significant factor in determining financial stress and anticipated stigmatization among participants. Rather, their subjective feelings about the size of their debt played a more important role. This led to many individuals not only hiding their debt levels, but also avoiding seeking help to overcome their financial struggles.
The study demonstrated that anticipated stigmatization is linked to debt concealment, even in common debt situations across a diverse North American population, and not just in extreme cases such as near-bankruptcy or home foreclosure.
The study recommends that policymakers and financial professionals help indebted consumers by offering community-based debt reduction courses that provide a supportive and non-judgmental environment where participants can frequently disclose their struggles with debt. These courses should foster small group activities and encourage partnerships to facilitate interactions both inside and outside of class, while emphasizing the shared experiences of participants in dealing with debt.
